By Brendan Conway

Sentiment on the gold-mining sector could scarcely be worse. But history suggests the math is starting to add up for the long-term buyer.

Sure, outflows continue from gold-tracking exchange-traded funds such as SPDR Gold Trust (GLD). As the Federal Reserve moves closer to the inevitable “taper,” the price of gold could fall even farther, fail to recover, and put some or even many miners in existential peril.

What’s more, the argument that gold-backed financial instruments or gold-producer stocks benefit from “cracks in the financial system” is under credible attack. As one pundit put it this week, the mining stocks are still stocks. “[I]f the stock market crashes, trust me, they do too.” If you’re worried about financial armageddon, bury a gold bar in your yard. Or better yet, buy something people can actually use — like a gun, or a handle of Jack Daniels. Not a gold ETF or miner stock.

In this context, we get an idea why the two-year chart of Market Vectors Gold Miners ETF (GDX) looks like this. Yesterday’s intraday low at $22.21 hadn’t been seen since late 2008.

The ETF is now approaching a decline of 70% from its mid-2011 peak. For Market Vectors Junior Gold Miners ETF (GDXJ), which launched in late 2009, yesterday’s intraday low of $8.21 was a lifetime low — and an 80% drop from the late 2010 peak.

Lately, we see leveraged ETFs like Direxion Daily Gold Miners Bear 3X Shares (DUST) dancing higher (or, more rarely, lower) to the tune of 10% or 20% per session. DUST is up a jaw-dropping 400% this year.

All this raises a question: If your investment is diversified across a large enough number of companies — 30 or so for GDX, 40 for iShares MSCI Global Gold Miners Fund (RING) or, better yet, more than 70 for GDXJ — do you really think the prospects of an entire industry can remain this downtrodden indefinitely? It’s already been years of prices declines.

With the caveat that these are U.S. precedents — most of which didn’t bear the complications of risky gold mines in African countries, say, or being on the wrong side of the Federal Reserve — the average battered sector has soared after similar declines.

Add a Comment

We welcome thoughtful comments from readers. Please comply with our guidelines. Our blogs do not require the use of your real name.

Comment

There are 3 comments

JUNE 27, 2013 9:47 A.M.

eddy112 wrote:

I confess, I broke down and bought a 1000 shares of GDXJ on the theory that it represents deep, deep value. I also picked up some goldcorp (GG). I now have an investment in arguably the strongest miner and a basket of junky ones. Many will not survive low gold prices for long. For example, GDXJ's highest reported holding (this may be out of date!) is Torex mining. I've never heard of it, it probably isn't even a hole in the ground and goes for $1/share.

However, if it survives it could a 10 bagger!!

JUNE 27, 2013 1:00 P.M.

coupe1953 wrote:

Could someone tell me, has anything changed in the world financial system since gold was at it highs? I would have to say no. We are even further in debt with no end in site. Europe is for the most part, broke. China is beginning to collapse because it is built on massive real estate debt and cheap labor. You can't build 17 cities every year the size of Chicago with no one in them. How long do you think that can last. Last week their credit market froze up. soon people will get nervous and then they will get scared. It is the biggest bubble the world has ever known. Paper assets are declining, look at bonds some bond funds have lost quite a bit of net asset value. People like stocks for now, because they are going up but if they start to decline a certain amount, they will also head for the exits. People ask where the price of gold and silver are going. I say do not worry about that as over a period of years it will continue to rise and think of it as insurance. As for the gold miners, you know that the cost of production is near the price of gold and silver. How long do you think that is going to last. The miners will want to at least break even or make a profit so they will ask for a certain amount for their product.

About Focus on Funds

As exchange-traded funds and other investing vehicles have ballooned in number, the task of figuring out what works well and what doesn’t has only gotten harder. Barrons.com’s Focus on Funds looks under the hood of ETFs, mutual funds and hedge funds for overlooked values, actionable ideas and the latest pitfalls for fund investors.

Chris Dieterich has covered the U.S. stock market for The Wall Street Journal and Dow Jones Newswires. He is a graduate of Regis University and the Missouri School of Journalism.